Monday, April 6, 2009

These two charts make the case that the housing market has seen the worst of its decline, which started over three years ago. The first chart is Bloomberg's index of the stocks of major home builders, and today it is about at the same level it was at in mid-October. Despite all the terrible housing news, these stocks have not declined further in value on balance over the past six months—a good sign that all the bad news has been priced in. The second chart shows the yield on 10-year Treasuries compared to the yield on FNMA current coupon conventional mortgages (homeowners pay a rate about 50-100 bps higher than that). What we see is the MBS spreads are back to "normal" levels while mortgage rates are at generational lows. Indeed, since the MBS market was first created in the 1970s, rates have never been so low. Add to that the fact that home prices are significantly below their highs in both nominal and especially in real terms, and you have a tremendous surge in housing affordability. No wonder sales activity is picking up dramatically in all the markets that have been the most distressed.

22 comments:

This is a great article, I have been saying the same thing. If you look at the facts people will see. I have been a broken record for the last month or so. Priceing is starting to level out, inventory is going to stabalize, and interest rates can not stay as low as they are forever. Especially now, think about it 4.7%!!! wow....

I liked it so much I am going to post it to my blog, hope you don't mind...I will link it back to yours..

No problem here, we need to spread the word. Once the market realizes that home prices are no longer falling it will be incredibly bullish. A bottom in home prices is basically a necessary condition for a financial market recovery.

Sales are rising but prices are still plummeting nationally. Foreclosure sales now account for nearly half the market and although this will drive up sales numbers it will continue to drive down prices especially as prime ARMs start resetting on a massive scale in 2010-2011.

As housing prices in certain parts of the country drop to a level close to building cost (such as Las Vegas and Phoenix) expect prices to pick up. But on a national level real housing prices are still 37% above their average from 1890 through 1997 (based on the Shiller mational real housing price index). Thus there is still plenty of room for prices to drop nationally and especially in those parts of the country (such as Boston, New York, or my town of Hockessin, DE) where prices never fell far from peak.

Furthermore the Chicago Mercantile Exchange futures trade for the S&P/Case Shiller Composite Ten Index suggests national housing prices will fall another 10% through November of 2011 before rebounding.

Historically housing prices are far less volatile than other markets and tend to move in one direction or another for years or decades at a time. The last time we had a national housing bubble was the relatively small one that peaked in 1989. Real housing prices declined through 1997. And our current housing bubble is more on a scale like Japan's that peaked in 1990. Real housing prices there have fallen every year since and are still falling (down 40% so far).

That's not to say that prices won't recover in some parts of the country before others (as I said before, probably Phoenix or Las Vegas). But I would still be very wary of buying a house right now without researching the specific market.

Good points, Mark Sadowski. But in a world in which prices invariably rise over time due to inflation, the fact that a technical loss in inflation adjusted dollars occurs does not matter so long as nominal real estate prices increase. If I borrow $500,000 to buy a $550,000 home and prices rise 20% but that 20% rise does not keep pace with inflation, I have still made a significant profit based on the initial cash investment and the banks have additional security for their loans. This is the point, in my view, and this is the way forward out of the recession.

Good points Mark, and of course one should check local market conditions carefully. My main point is that the housing market has had well over three years to make an adjustment. Bad press has been in people's face for years. It's hard to imagine so much bad news for such a long time. I know that some markets are already experiencing bidding wars for foreclosed properities (Inland Empire, CA). Meanwhile, the Fed has never, ever been so incredibly easy and mortgage rates have never been so low and there is no sign of a generalized deflation as many have been expecting. If prices have come down a lot in your area, I see no reason to not move forward with plans to purchase after prudent review.

Sorry to be off-topic and I won't make a habit of it. But further to my recent question, Scott, about Mish Shedlock's view, I wondered what you make of some of the other bloggers that I read, eg The Big Picture, The Market Ticker, Calculated Risk, Naked Capitalism, Nouriel Roubini ... It's just that you have been so much more upbeat than all these others. Even Paul Krugman seems very wary ...

Scott,I've been looking at local unemployment rates lately. I could not help but notice your reference to the Inland Empire.

I know this is a little off topic but it seems to me that the San Joaquin Valley has suffered much more than the country in general. I've never been to California and I was wondering what your reflections might be with respect to my observation.

heels: as you note, there are lots of awful-looking datapoints out there on the housing market. The question for investors and potential buyers, however, is whether all that bad news has already been priced into the market or not. Also, I would note that some of those series have fairly long lags built into them. A fourth quarter 2008 statistic is very old news by now. In any event, my hunch is that most of the bad news has been priced. Sure, prices might fall a little more here and there, but the big bulk of the declines is behind us. It is time to start looking for good news.

The Inland Empire (approximately everything that is 30-60 miles east of Los Angeles) has really been clobbered. The overbuilding was mind boggling. The price declines in the past year or two have been spectacular. But homes are selling, and their are bidding wars on foreclosed homes. Many prices are down about 50% from their highs of 3-4 years ago, and are back to the levels of 2001-2002. I don't know much at all about the San Joaquin Valley.

A fourth quarter 2008 statistic is very old news by now. In any event, my hunch is that most of the bad news has been priced

Of course a Q4.08 stat is old news. Do you have any current news?

I'm surprised that you have not responded with green shoots on the demand curve when the supply curve is barren.

The supply curve is a function of net household formation + replacement of demolitions. Now it seems to me that household formation and demolition is in a contraction phase until the unemployment rate peaks sometime next year.

Some further outdated data. Between 2005 and 2007, the supply increased by 4.1 million units and the demand increased by 1.8 million units. There are 2 million excess units created from the peak. If home builders totally ceased production for 18 months, the quantity demanded of housing would be at current prices.

Maybe Hollywood will blow up abandoned structures in a subdivision in the Inland Empire just like they did 2 decades ago with the Lethal Weapon flick, thereby reducing supply.

As an aside, too bad that no one at Carpe Diem has anything to offer on a cross post.

The best current news is found in the real-time prices of things like currencies, commodities, spreads, the yield curve, and equities.

Housing starts have collapsed forom 2.2 million units per year in 2005 to less than 0.5 million units currently. That goes an awful long way to addressing the excess inventory. We could quibble about decimal points, but surely the bulk of the excess inventory has already been cleared.

heels: I try very hard to base my arguments on facts and logic, and to avoid ad hominem attacks. The near-absence of nasty comments on this forum may reflect that. If you would look more closely at your own CME reference, you would see that, as Pat notes, lumber prices (per the front month contract) are up about one-third from their lows earlier this year. In my view that counts as "rebounding strongly."

heels: If the bulk of So. Calif. real estate sales are distressed sales, is that not a good reason to suspect that prices may be at or close to their lows? It is almost axiomatic that when the majority of people are motivated sellers, prices are indeed at distressed levels.

Everyone can see the stats and the prices and the policies. But there is no science which tells you how to interpret them. I'm offering my interpretations for free; if you disagree with my reasoning I welcome your constructive suggestions.

What the hell did I do. You posted some spread charts completely divorced from any sense of reality and made a conclusion which was summarily dismissed based on linked evidence which you did not refute, other than argument from authority or some other bull.

Listen, if you don't understand contango and backwardation in commodity markets [lumber is in backwardation], there ain't no point discussing the housing market.

Upper tier Cali property prices are going down big time. Just remember that when you were sniggering at the suckers in Victorville. Adios.